Ratan Tata has argued that spectrum should be paid for or auctioned, Sunil Mittal thinks the government should not auction spectrum. That debate has split the mobile services industry.

Call it the great 3G spectrum ripoff. Or call it a short-sighted bid to garner money for the government. Howsoever mobile services companies see it, one thing is clear – a huge controversy has erupted, with the mobile services industry split down the middle.

The bone of contention? Should the government charge mobile services companies for providing 3G (short for third generation) spectrum (or the airwaves through which mobile phone services are provided – in this case, mobile services which will offer high speed internet services and data services)? Or should spectrum be free?

The row broke out a fortnight ago when Tata group chairman Ratan Tata shot off a letter to Communications Minster Dayanidhi Maran urging that 3G spectrum should be paid for.

Tata said that the Tata group would be willing to fork out Rs 1,500 crore for spectrum. Alternatively, the venerable Tata suggested, this scarce resource could be auctioned.

He is right, in a manner of speaking. Why should the government hand out spectrum free to mobile service companies? Most countries around the world have resorted to two ways of giving spectrum – they either auctioned it or held a so-called beauty contest, with the handing out of spectrum linked to roll out and other obligations.

Among the exceptions to this rule was Finland, one of the first nations where 3G services were available. In Finland, spectrum was given free.

The finance ministry has now got into the act. It has written to the department of telecommunications asking it to auction spectrum – and has quietly rapped the Telecom Regulatory Authority of India (TRAI) on its knuckles, pointing out that TRAI does not have the power to decide on the pricing of spectrum.

Tata’s letter queered the pitch for most mobile service companies. They had been quietly lobbying the government for free spectrum.

Indeed, Bharti group chairman Sunil Mittal made it plain that while most mobile service companies were ready to pay for spectrum, doing so was not viable and he was opposed to it.

He said that the Prime Minister’s Relief Fund was always available to anyone who wanted to donate money. Telecom Regulatory Authority of India chairman Pradeep Baijal too backed Mittal and implied that auctioning spectrum would be a recipe for disaster.

Argues Baijal: “If you don’t give 3G spectrum free to the existing operators, you will choke their growth.”
The mobile services industry’s case for free spectrum is voiced by Cellular Operators Association of India (COAI) secretary general T V Ramachandran.

“The Tata proposal will only make telecom services unaffordable as the cost has to be passed on to consumers,” he declares. Ramachandran cites several reasons for contending that spectrum should be given free.

First, 3G licences were auctioned in Europe and bidders paid huge, huge prices, leading to a financial bloodbath and delays in rolling out 3G services.

Ergo, auctioning licences and spectrum is not help the industry grow.

Secondly, if mobile service companies have to pay for spectrum, the prices of services will only go up, making these unaffordable.

Thirdly, their current licences allow mobile service companies to provide all kinds of data and voice services, including 3G services.

So auctioning spectrum is out of the question. Some of COAI’s members in fact privately threaten to go to court if the government forces them to pay for spectrum.

Finally, COAI contends that 3G services will help usher in a telecom revolution in rural India where broadband through 3G services will become a reality.

Says Ramachandran: “Also, 3G spectrum can give five times more voice capability than 2G spectrum. This will help us in obtaining more subscribers.”

Such arguments can be seen as self-serving. But the issue has become divisive. Cellular service companies like Spice Telecom and the C Sivasankaran- promoted Aircel which operates in Tamil Nadu and Chennai back Tata.

Says Sivasankaran: “If we want to reach the 200 million subscriber numbers by 2007, we need to auction 3G licences.” On the other side of the technology divide, the Association of United Telecom Services Providers of India, which represents the interests of code division multiple access (CDMA) companies Tata Teleservices and Reliance Infocomm, backs free spectrum and opposes Tata’s suggestion that they should pay for it.

Still, many are outraged by the idea of providing 3G spectrum free. Exclaims B K Syngal, a former Videsh Sanchar Nigam Ltd chairman who’s now vice chairman of BPL Communications argues in his private capacity (though he says that BPL Communications in its presentation has made it clear that spectrum should be paid for): “Giving spectrum free would be a disaster. It is a limited resource. Tell me in which other industry do companies not pay for their raw material? It’s like giving away your iron to Posco free of cost.”

Adds Mahesh Uppal, the telecom consultant: “If you consider spectrum an economic resource, there has to be a price for it. If auctions failed in Europe it was because the design of the auctions was not right, not because auctions were wrong per se.”

The argument that auctions would force companies to over bid, as happened here in 1995, is rubbished. In 1995, telecom wannabes forked out over Rs 15,000 crore each for an all India licence for 10 years.

But in 2005 when bids were again sought, they paid only around Rs 1,600 crore for a 20 year licence – 5 per cent of what was paid during the 1995 bidding. Says a telecom expert:”This clearly shows that the market has matured and there is no reason to believe that operators will overbid and that there will be a crises like in Europe.”

Also, he notes, those who argue that by paying for spectrum 3G will become unviable should steer clear of the bidding.

In Europe, auctions lead to overbidding only in the UK and Germany. In Austria and Australia, the bids were reasonable and no one really went bankrupt.